Sison, Rizalito Jr. O.

PROBLEMS

PROBLEM 2-21
On January 1, 2022, Bloody Red Company issued to its chief executive officer share options for the
purchase of the company's ordinary share at a strike price of P50. The options are exercisable,
beginning January 1, 2025 and expire on December 31, 2026. The options may be exercised only
if the officer is still in the employ of the company at the date of exercise. The share options are valued
at P30 per share on January 1, 2022 based on the option-pricing model used by the company.

The number of share options granted will be based on the following level of sales for the year 2024:

Level of Sales
Below P30,000,000
P30,000,000 - P50,000,000
Over P50,000,000 - P70,000,000
Over P70,000,000

Estimates of sales for 2024 were as follows:

Estimated made at
January 1, 2022
December 31, 2022
December 31, 2023

Actual sales for 2024 were P75,000,000.

REQUIRED:
Prepare all entries in 2022 through 2024 related to the above data.

PROBLEM 2-22

On January 1, 2022, Striking Red Company issued 10,000 share appreciation rights (SAR) to selected
employees that vest after three years, provided the employees remain employed by the company at
least until the exercise date. Each SAR entitles the employee a cash payment for an amount the share
price of the company's ordinary share exceeds P120.

The market price of Striking Red's ordinary share at the end of each vesting year is as follows:

December 31, 2022 140

December 31, 2023 150
December 31, 2024 165

REQUIRED:
a) Prepare all entries in the books of Striking Red Company for years 2022, 2023 and 2024.
 b) Give the entry for the exercise of the SAR assuming that
(1) the rights were exercised on January 1, 2025, when the market price of the ordinary share is P165.
(2) the rights were exercised on December 31, 2025, when the market price of the ordinary share is P172.

PROBLEM 2-23

On January 1, 2022, Red Bull Corporation issued 10,000 share January appreciation rights to its selected
employees that vest on 1, 2025 provided these employees are still in the employ of the company. Each
SAR provides for a cash payment equal to the excess of the company's share market price on exercise
date over P120. All of the share appreciation rights were exercised in 2025 when the share market price
was P165.

The fair value of each SAR and the fair value of the share are made available to you at the following dates:

FV of SAR
December 31, 2022 26.80
December 31, 2023 31.20
December 31, 2024 39.40

REQUIRED:
a) How much liability shall be presented in the statement of financial position
at the end of each year 2022, 2023, and 2024, respectively?
b) Prepare all entries for the years 2022 through 2025 to record the foregoing.

PROBLEM 2-24

On January 1, 2022, Ruby Red Company granted to each of its four executives the right to choose either
1,000 ordinary shares or to receive cash payment equal to 900 shares. The grant is conditional upon the
completion of three years of service. The entity estimates that the value of the share alternative on
January 1, 2022 is P150 per share. Ruby Red's ordinary share capital has par value of P100.

The following table shows the fair value of Ruby Red's ordinary share:

January 1, 2022 158

December 31,2022 160
December 31,2023 165
December 31,2024 168
December 31,2025 172

One executive exercised his right to receive the cash alternative on December 31, 2024; the others
chose to receive the ordinary shares on December 31, 2025.

REQUIRED:
a) Determine the amount assigned to equity on January 1, 2022.
b) Compute the amount charged to Compensation Expense during the years 2022, 2023, 2024, and 2025 as
 a result of the foregoing.
c) Prepare all entries relating to the above during the years 2022 through 2025, inclusive.

PROBLEM 2-25

The Red Santa Company began its business in 2022 with P13,000,000 retained earnings account balance,
of which P4,000,000 is appropriated for plant expansion. During the year 2022, the following events occurred:

1) A material error was discovered in the financial statements for the year 2021, which caused
depreciation of 2021 to be understated by P200,000. The company's income tax rate is 30%.

2) Cash dividends of P5 per share on the 300,000, P100 par ordinary shares outstanding were declared and
distributed, after paying the required annual dividend on its 200,000 shares of 8% P100 par preference share.

3) Ten thousand shares of preference share capital were retired at P150 per share. These shares
were originally share. issued at P130 per share.

4) The company completed its plant expansion project and released the retained earnings previously
appropriated for this purpose.

5) A bonus issue of 45,000 shares of ordinary share capital was distributed to shareholders. The shares sell
at P150 per share on date of declaration and P140 per share on the date of distribution. There were
300,000 shares issued and outstanding before the bonus issue.

6) During 2022, the company issued P20,000,000, 10-year 12% bonds. The bond indenture provides that
Red Santa shall restrict P2,000,000 of retained earnings annually for the accumulation of enough funds
for this indebtedness.

7) Profit for the year was P3,000,000.

REQUIRED:
Compute the retained earnings balance that will be shown in the statement of financial position at
December 31, 2022. How much of this balance is unavailable for further distribution of dividends?

PROBLEM 2-26

Red Hat Company began operations in January 2020 and reported the following results of operations for
each of its first three years of operations: 2020-P600,000 loss; 2021-P240,000 loss; 2022 - P3,900,000 profit.

At December 31, 2022, the company's capital accounts were as follows:

9% Cumulative Preference Share Capital,

P100 par; 100,000 shares authorized;
60,000 shares issued and outstanding
Ordinary Share Capital, P10 par; 1,000,000
 shares authorized; 800,000 shares issued
and outstanding

Red Hat Company has never paid a cash dividend or bonus issue and there has been no change in the
capital accounts since it began operations.

REQUIRED:
a) Computation of book value per share of preference and ordinary share at December 31, 2022.
b) Assuming that the preference share has a liquidation value of P105 per share, compute the
book value per share of the preference and ordinary share at December 31, 2022.

PROBLEM 2-27

Red, Inc. has experienced several poor earnings and has several assets on its books that are
undervalued. It desires to revalue its assets and eliminate the deficit. At December 31, 2022, the
company owns the following identifiable assets:
Accumulated
Cost Depreciation
Inventory 1.0M -
Land 5.0M -
Buildings 7.5M 3.5M
Machinery & Equipment 3.5M 1.5M

The statement of financial position on December 31, 2022, reported a deficit of P2,000,000.

REQUIRED:
Journal entries to record the quasi-reorganization.

PROBLEM 2-28

The Skinny Red Company has a deficit in retained earnings of P1,000,000. Business appears to be turning
around, so the president wants the company to go through a quasi- reorganization.
The statement of financial position of the company prior to the reorganization contains the following information:

Current assets 500,000

Land 1,500,000
Buildings 5,000,000
Liabilities 1,000,000
Accumulated depreciation 1,000,000
Ordinary share capital, P20 par value 6,000,000
Retained earnings (Deficit) - 1,000,000

As part of the quasi-reorganization, the current assets and buildings are to be written down by P100,000
and P300,000, respectively. Ordinary share capital is to be exchanged and will be restated at a legal
capital of P4,000,000. The resulting share premium will be used to cancel the resulting deficit.
REQUIRED:
a) Journal entries to record the quasi-reorganization.
b) A statement of financial position immediately after th quasi-reorganization
fficer share options for the
ptions are exercisable,
ns may be exercised only
. The share options are valued
used by the company.

el of sales for the year 2024:

Number of Options
Nil
10,000 shares
15,000 shares
18,000 shares

2024 Estimated Sales

P35,000,000
52,000,000
70,000,000

tion rights (SAR) to selected

employed by the company at
ment for an amount the share

ting year is as follows:

s 2022, 2023 and 2024.

arket price of the ordinary share is P165.
e market price of the ordinary share is P172.

ppreciation rights to its selected

e employ of the company. Each
hare market price on exercise
25 when the share market price

able to you at the following dates:

FV of Share
145
150
160

e foregoing.

utives the right to choose either

he grant is conditional upon the
e of the share alternative on
par value of P100.

ember 31, 2024; the others

the years 2022, 2023, 2024, and 2025 as

hrough 2025, inclusive.

tained earnings account balance,

r 2022, the following events occurred:

he year 2021, which caused

ny's income tax rate is 30%.

y shares outstanding were declared and

000 shares of 8% P100 par preference share.

P150 per share. These shares

d the retained earnings previously

ributed to shareholders. The shares sell

he date of distribution. There were

ds. The bond indenture provides that

for the accumulation of enough funds

tement of financial position at

her distribution of dividends?

ollowing results of operations for

0,000 loss; 2022 - P3,900,000 profit.

6,000,000
 8,000,000

ere has been no change in the

share at December 31, 2022.

05 per share, compute the
cember 31, 2022.

on its books that are

December 31, 2022, the

Book Value Fair Value

1.0M 0.7M
5.0M 6.5M
4.0M 5.0M
2.0M 2.2M

eficit of P2,000,000.

0. Business appears to be turning

rganization.
ization contains the following information:

to be written down by P100,000

nd will be restated at a legal
el the resulting deficit.
Nil
Sison, Rizalito Jr. O.
ANSWERS

PROBLEM 2-21
2022
Jan. 1 Memo: Issued to its CEO share options for the purchase of ordinary shares at a
strike price of P50. The options are exercisable beginning January 1, 2025 and
expire on December 31, 2026. The number of share options will be based on
the level of sales for 2024.

Dec. 31 Compensation Expense 150,000

Share Options Outstanding 150,000

2023
Dec. 31 Compensation Expense 150,000
Share Options Outstanding 150,000

2024
Dec. 31 Compensation Expense 240,000
Share Options Outstanding 240,000

PROBLEM 2-22
(a)
2022
Dec. 31 Compensation Expense 66,667
Share Appreciation Rights Payable 66,667

2023
Dec. 31 Compensation Expense 133,333
Share Appreciation Rights Payable 133,333

2024
Dec. 31 Compensation Expense 250,000
Share Appreciation Rights Payable 250,000

(b)(1)
2025
Jan. 1 Share Appreciation Rights Payable 450,000
Cash 450,000

(b) (2)
2025
Dec. 31 Share Appreciation Rights Payable 450,000
Compensation Expense 70,000
Cash 520,000
PROBLEM 2-23
(a)
Liability at December 31, 2022 P 89,333
Liability at December 31, 2023 P208,000
Liability at December 31, 2024 P394,000

(b)
2022
Dec. 31 Compensation Expense 89,333
Share Appreciation Rights Payable 89,333

2023
Dec. 31 Compensation Expense 118,667
Share Appreciation Rights Payable 118,667

2024
Dec. 31 Compensation Expense 186,000
Share Appreciation Rights Payable 186,000

2023 Share Appreciation Rights Payable 394,000

Compensation Expense 56,000
Cash 450,000

PROBLEM 2-24
(a)
Fair value of the equity alternative P600,000
Fair value of debt component 568,800
Fair value of equity component, January 1, 2021 P 31,200

(b)
2022 3,600 x 160=576,000; 576,000/3 P192,000
31,200/3 10,400
Total compensation expense P202,400

2023 3,600 x 165 x 2/3 = 396,000

396,000 – 192,000 P204,000
31,200/3 10,400
Total compensation expense P214,400

2024 3,600 x 168 = 604,800

604,800 – 396,000 P208,800
31,200/3 10,400
Total compensation expense P219,200
 2024 2,700 x (172-168) P10,800

(c)
2022
Jan. 1 Granted each of the four executives the right to choose either 1,000
ordinary shares or to receive cash payment equal to 900 shares,
conditional upon the completion of three years of service.

Dec. 31 Compensation Expense 202,400

Share Options Outstanding 10,400
Share Appreciation Rights Payable 192,000

2023
Dec. 31 Compensation Expense 214,400
Share Options Outstanding 10,400
Share Appreciation Rights Payable 204,000

2024
Dec. 31 Compensation Expense 219,200
Share Options Outstanding 10,400
Share Appreciation Rights Payable 208,800

31 Share Options Outstanding 7,800

Share Appreciation Rights Payable 151,200
Cash 151,200
PIC from Unexercised Share Options 7,800

2025
Dec. 31 Compensation Expense 10,800
Share Appreciation Rights Payable 10,800

31 Share Options Outstanding 23,400

Share Appreciation Rights Payable 464,400
Ordinary Share Capital 300,000
Share Premium – Ordinary 187,800

PROBLEM 2-25
Appropriated Unappropriated
Retained Earnings, January 1, 2022 P4,000,000 P9,000,000
2022 Transactions:
(1) (140,000)
(2) On Preference (1,600,000)
On Ordinary (1,500,000)
(3) (200,000)
(4) (4,000,000) 4,000,000
 (5) (6,750,000)
(6) 2,000,000 (2,000,000)
(7) 3,000,000
P2,000,000 P3,810,000
Total Retained Earnings P5,810,000

PROBLEM 2-26
Retained earnings balance as of December 31, 2022 P 3,060,000
Total shareholders’ equity as of December 31, 2022 P17,060,000

(a) Preference Ordinary

Par value of preference share P6,000,000
Dividends in arrears 1,620,000
Excess to ordinary P9,440,000
Total equity P7,620,000 P9,440,000
Divide by the number of shares outstanding 60,000 800,000
Book value per share P 127 P 11.80

(b) Preference Ordinary

Liquidation value P6,000,000
Dividends in arrears 1,620,000
Excess to ordinary P9,140,000
Total equity P7,920,000 P9,140,000
Divide by the number of shares outstanding 60,000 800,000
Book value per share P132 P11.43

PROBLEM 2-27
Retained Earnings 300,000
Inventory 300,000

Land 1,500,000
Buildings 1,875,000
Machinery and Equipment 350,000
Accum. Depreciation – Buildings 875,000
Accum. Depreciation – Machinery & Equipment 150,000
Revaluation Surplus 3,700,000

Revaluation Surplus 2,300,000

Retained Earnings 2,300,000

PROBLEM 2-28
(a)
Retained Earnings 400,000
Accumulated Depreciation 75,000
Current Assets 100,000
 Building 375,000

Ordinary Share Capital 6,000,000

Ordinary Share Capital 4,000,000
Share Premium - Ordinary 2,000,000

Share Premium - Ordinary 1,400,000

Retained Earnings 1,400,000

(b)
Skinny Red Company
Statement of Financial Position
Current Assets P 400,000 Liabilities P1,000,000
Land 1,500,000 Ordinary Share 4,000,000
Buildings 4,625,000 Share Premium 600,000
Accumulated Depreciation (925,000)
Total P5,600,000 Total P5,600,000